ESG and SDGs. Two Complementary Frameworks

The origin of the ESG or Environmental, Social and Governance framework can be traced back to the 70s. Sustainable Development Goals (SDGs), established by the United Nations General Assembly in 2015, set forth 17 critical areas to address economic, social, and environmental challenges by 2030.

Both frameworks operate under the same principle; the need to establish a sustainable and just global economy.

ESG provides a corporate perspective that encourages companies to highlight their efforts to be socially and environmentally responsible under effective governance. The compatibility with the 17 SDGs, on the left, can be seen in the diagram below.

The ESG framework encourages companies to adopt internal and external policies that change their operations and improve communication with stakeholders including investors, customers and governmental agencies.  The business sector accounts for 72 % of the GDP of the 38 member counties of the Organization for Economic Co-Operation and Development (OECD). With ESG goals, strategies and policies that are effective and timely, businesses can assure that we can all eventually live on a healthy planet within a safe and equitable society.

The alternative is undoubtedly the end of civilization as we know it, especially when considering the impact of SDG #6 (Affordable and Clean Energy) and #13 (Climate Action). Plastic waste in the environment is an example of a very significant issue not included in the United Nations’ SDGs which should also be part of any corporate ESG initiatives.

Competition among companies is the key to a well-functioning, non-monopolistic capitalist  economy. Awareness about ESG and SDG is significantly increasing everywhere and at all levels. Companies are now providing information about their ESG strategies and policies as a way to distinguish themselves from other companies in their industries.  Ultimately it will be up to external stakeholders to insure their implementation and their compatibility with SDG and other similar frameworks such as CSR (Corporate Social Responsibility) and the 3 Ps (“people, planet and profit”).

The path towards a sustainable and just economy exists. Currently needed is the means to encourage corporations to proceed forward.

Advance ESG is the only non-profit organization that empowers public stakeholders to effectively influence companies to improve their ESG policies and strategies.  Call it “ESG checks and balances,” the “wisdom of the crowd,” or even “grassroots for sustainability.” It is an approach to ESG advocacy whose time has come.

How to change corporate ESG behavior

The growth of socially responsible investing (SRI) has skyrocketed over the past several years. There is now over $17 trillion, or nearly 1/3rd of all capital under management, within funds that include progressive environmental, social and business governance (ESG) and similar criteria within their investment decision making process. Many large investment firms, including BlackRock and Vanguard, are calling upon companies within their portfolios to prioritize long-term ESG considerations over short-term profit generation. With that kind of financial leverage, positive ESG changes in corporate behavior should be easy and straightforward to accomplish.

It’s not that simple.

Corporations and investment managers have a long history of verbal support for progressive ESG policies followed by either inactivity or actual efforts to oppose those principles. Although asset managers put, “significant effort into meeting institutional pressures to demonstrate transparency and responsible behavior,” their actual investment behaviors were inconsistent with responsible ownership. In 2019, a New York Times commissioned review of the proxy votes cast by BlackRock and Vanguard found that these two biggest fund managers, “tended to side with management and vote against shareholder-sponsored resolutions more frequently than other big fund companies,” including ESG focused efforts. SEC regulators reported this April that several investment firms that market themselves as investors in companies that that pursue ESG strategies were making potentially misleading statements about their ESG investment processes as well as their adherence to global ESG frameworks. More recently, five of the nation’s largest banks recommended to their shareholders that they reject racial equity resolution audits after previously expressing solidarity with the Black Lives Matter movement.

Despite these roadblocks, creating positive changes in corporate ESG policies is still possible. Boycotts, like the ones that targeted companies doing business with the former apartheid South African government, can succeed, but they are difficult to coordinate and maintain. A better technique is through investor advocacy whereby shareholders, because of their ownership position, can influence corporate policies. Just one recent example is the success of the environmentally focused investment firm, Engine No. 1, in their efforts to place independent Board Directors at Exxon.

Although often effective, this type of advocacy it is only available to mutual funds and other entities that own sufficient shares in the corporation. It is essentially impossible for an individual to afford enough shares to be able to positively influence the hundreds of corporations whose ESG policies need to be addressed. While there are several ESG focused advocacy organizations that coordinate such activities for both individual and institutional investors, they do not provide a mechanism for non-investors to influence corporate ESG strategies.

Another approach is required for the general public and other stakeholders to have an impact on corporate ESG policies. Most corporations are extremely sensitive to public opinion and expend extraordinary amounts of effort and expense to protect their reputation. This makes public pressure a very effective means to compel changes in corporate behaviors. Witness Delta Airline’s CEO’s rapid reversal of his support of the new restrictive Georgia voting laws in response to public outcry. And since shareholder resolutions submitted to a vote at corporate annual meetings are often non-binding, they can be ignored by corporate management unless supported by a significant amount of popular demand.

Integrating public pressure with shareholder engagement is the most effective way to compel positive changes in corporate ESG policies. By coordinating shareholder advocacy with social pressure, Advance ESG provides the public a voice in corporate decision-making. This allows individual investors and non-investors alike to help make corporations more environmentally and socially responsible.

Not a fire, but an opportunity

The annual meetings of Exxon and Chevron, two of the world’s largest oil companies, are seldom controversial. Most agenda items, like director re-appointments and reviews of the financial statements, are routinely rubber-stamped by the participants. Management can customarily count on the support of the shareholders to out-vote any objections to their performance and plans.

Not this year.

At Exxon’s annual meeting, climate change activists led by Engine No. 1, a sustainability-focused hedge fund, successfully replaced 2 of the sitting Board Directors with 2 of their own independent candidates over the objections of Darren Woods, the company’s CEO. And at Chevron’s annual meeting, 61% of the shareholders voted in favor of a proposal that compels the company to cut their carbon emissions.

These events are a culmination of years of dedication and hard work by organizations such as Proxy Impact, ICCR, As You Sow and several others that utilize the access provided by owing shares in corporations. Many more ESG focused resolutions are on other corporate annual meeting agendas and with the recent support of funds such as Engine No. 1, BlackRock and Vanguard, they also stand a good chance of passing.

While some have characterized this as a “bad day” for the oil and gas industry, these events actually bode well for these companies. Despite the public rhetoric, a large number of corporate CEOs support the Business Roundtable assertion that companies have to focus on the social and environmental impacts of their business decisions in order to create long-term value. Because management is beholden to shareholders who are often more concerned about short-term capital gains, CEOs have been reluctant to risk their jobs by supporting ESG considerations that could negatively impact the quarterly financial statements. The successes at Exxon and Chevron, combined with the recent Hague court ruling that requires Shell to cut its carbon emissions by 45% in 10 years, can provide both the impetus and political cover for corporate management to prioritize ESG within their corporate policies.

But much like trying to turn an aircraft carrier, progress will be slow. And there will undoubtedly be many forces aligned against these changes, both within and outside of these corporations. Shareholder advocacy definitely works, but its overall effectiveness depends upon the sustained support of other stakeholders, including the general public, who will provide the pressure required to compel corporations to become more socially and environmentally responsible.

What is shareholder activism?

Shareholder activism is a method to influence corporate policies and practices. As partial owners of a corporation, shareholders, also known as stockholders, have certain specific rights including the ability to vote at the annual meetings on such matters as approval of the membership of the Board of Directors, executive renumerations, dividend distributions and mergers. Shareholders with a sufficient amount of ownership (or equity) in the corporation can also submit resolutions for a vote at the annual meeting.

Until recently, shareholder activism was utilized mostly by those who wanted to have more control of a corporation they believed was being poorly run financially. They would purchase a minority position and then utilize a number of methods, including threats of litigation and public relations pressure to compel changes in board composition and corporate policies. Carl Icahn and Bill Ackerman are two of the best known of this type of activists but these methods have had numerous other adherents.

With the increasing public awareness of the role of corporations in the critical environmental and social issues affecting today’s society, shareholder activism has evolved to include those who want to see changes in corporate ESG strategies and activities. The majority of corporations base their business decisions on the short-term impacts on their quarterly financial reports. ESG shareholder activists, including some of the largest investment funds and other organizations, utilize their ownership positions to shift the corporation’s focus toward the long-term implications of their policies and procedures. They also apply a variety of methods, including shareholder resolutions and direct negotiations with management, to achieve these aims. Shareholder activism plays a vital role in well‐functioning capital markets by holding companies more accountable to shareholders, especially those who seek a more ESG values-driven approach to corporate behaviors.